As Europe's car market shrinks, auto makers clash

ChristophRauwald

Volkswagen AG (VLKAY, VOW.XE) and Fiat SpA (F.MI) Thursday clashed over remarks made by the Italian auto maker's Chief Executive Sergio Marchionne, who accused his larger German rival of fueling a price war in the shrinking European car market that is causing steep losses in the industry.

Marchionne's comments made in an interview earlier Thursday and Volkswagen's reaction illustrate the deep rift between car companies relying on sales in debt-stricken Europe and rivals with a more diversified global presence, including a large footprint in more dynamic markets like China.

"Marchionne is unbearable as president of [European auto industry association] ACEA--we call for him to resign," Volkswagen's head of corporate communication, Stephan Gruehsem, said.

He described Marchionne's remarks as "once again unqualified." Gruehsem said Volkswagen, Europe's largest auto maker by sales, is considering leaving ACEA following Marchionne's comments.

Earlier Thursday, the International Herald Tribune cited Marchionne as saying that "it's a bloodbath of pricing and it's a bloodbath on margins" in the declining European passenger car market.

Marchionne, who is also CEO of U.S. auto maker Chrysler, called for the European Commission to intervene and help the sector cope with its huge overcapacity problems in Europe, according to the report.

"What they should do is coordinate a rationalization of the industry across the producing companies," he was cited as saying.

"The ones that really have not acted on this are the French and the Germans, who have not taken out any capacity at all."

Volkswagen on Thursday reported higher second-quarter profits and stuck to its full-year target of keeping earnings stable despite large investments in new vehicles and intensifying price pressure in Western Europe, where demand for cars has been declining for months amid economic uncertainty.

The results marked a stark contrast to mass-market rivals such as Peugeot-Citroen SA (PEUGY, UG.FR) or General Motors Co.'s
GM, +3.40%
European Opel unit, who suffer hefty losses due to their reliance on sales in Europe.

Demand for new cars has been shrinking for months in Europe. Analysts and industry executives expect the European car market to sag further in coming months as unemployment remains high and economic uncertainty persists amid tough austerity measures to tackle the raging sovereign-debt crisis.

Peugeot, Opel and several rivals in the fiercely competitive European mass-market segment face mounting pressure to slash production capacity. Fiat, however, benefits from its majority stake in Chrysler, which is reaping profits again following its large-scale restructuring under U.S. bankruptcy in 2009. Demand on its domestic Italian market, however, has been plummeting amid tough austerity measures.

Analysts estimate that the European car industry is squeezed by around 20% overcapacity, which weighs on earnings and makes it difficult for many manufacturers to operate profitably in the region. European politicians and labor unions, however, have vowed to fight large cutbacks.

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